The last few days have seen short-term rate trajectories surge higher and this morning's hotter than expected headline CPI pushed that one step further.
This has pushed the market's expectation to the point where it sees a 90% chance of a rate-hike by September...
That is well ahead (more hawkish) of The Fed's dot-plot expectations (and we also note that the market has caught UP to The Fed's 2023 expectations, as it was previously more dovish than The Fed)...
Nomura's Charlie McElligott notes that the global front-end is scrambling to pull-forward timing on potential hikes (thus adding risk premium), as Central Banks are forced to play “catch-up” and put the genie back in the bottle
For example, there are BIG short positionings being built in Dec22 ED$, which are pricing-in their most hawkish scenario of this cycle, which is corresponding with OI at highs
And it’s everywhere across the ED$ curve--ITC: “Since close of 7th Oct, largest changes and all look to be adding to or putting on new shorts: M2 +99k, U2 +34.2k, Z2 +107.5k, Z3 +52k and Z4 +25k”
Similarly, looking at systematic trend, we see the Nomura QIS CTA model with “-100% Short” signals established in Eurodollars, Euribor and Sterling contracts over the past 1w+ (only EuroYen as a “long”)—while CTA signals in G10 Bond futs is consensus “short” as well across USD 10Y, EUR, JPY, GBP, AUD, CAD, CHF, FRA and ESP (only ITA holding as a standout “+42% Long”)
So... bearish Rates / fixed-income is getting pretty crowded again.
However, while the front-end is leading The Fed down a hawkish rate-hike path, the back-end is screaming "policy error" as the yield curve bear-flattens...
The Fed has a problem.